Banco de Chile (BCH) Q2 2019 Earnings Call Transcript

BCH earnings call for the period ending June 30, 2019.

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Banco de Chile (NYSE:BCH)
Q2 2019 Earnings Call
July 30, 2019, 12:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, everyone. And welcome to Banco de Chile's Q219 financial results conference call. If you need a copy of the press release, it is available on the company's website. Today with us, we have Mr. Rodrigo Aravena, Chief Economist and Senior VP of Institutional Relations; Mr. Pablo Mejia, Head of Investor Relations; Daniel Galarce, Head of Financial Control, and Cecil Diaz, Investor Relations Specialist. Before we begin, I would like to remind you that this call is being recorded and that information discussed today may include forward-looking statements regarding the company's financial and operating performance. All projections are subject to risks and uncertainties, and actual results may differ materially. Please refer to the detailed note in the company's press release regarding forward-looking statements. I will now turn the call over to Mr. Rodrigo Aravena. Please, you may proceed.

Rodrigo Aravena -- Chief Economist and Senior Vice President-Institutional Relations

Thanks. Good afternoon, everyone. And thanks for participating in this conference call today. It's a pleasure for me to have the opportunity to talk about the highlights of this quarter for Banco de Chile, the trends observed in the Chilean economy, and the recent performance of the total banking industry. After my presentation, Pablo Mejia, our head of investor relations will provide a deep analysis of the financial results posted by our bank during the second quarter. Please go to slide No. 2 on Banco de Chile highlights for the second quarter '19. The second quarter for Banco de Chile very impressive in terms of results. We posted an ROAE of almost 23%, well above the level recorded last year and the first quarter ' 19. Our bottom line was also the highest in our history reaching 192 billion pesos. These achievements have been a result of both solid customer income generation as well as higher young customer income given favorable cheap interest rates and inflation.

Due to our front operating income rating use, we were able to show a remarkable efficiency ratio of 43%. Additionally, it's important to highlight that we have continued to implement new commercial strategies and data solutions for customers. And we are proud to say that this has result in 90% of our customers using online banking at Banco de Chile. And we continue to see important increases in usage rates in mobile banking where nearly 60% of customers are using these alternatives. Finally, we increased our free flows this quarter by 60% reaching a level of 44%. Please go to slide No. 4. See on the second half of 2018, the global economy has a great deviation.

As Chile is a country with the highest integration into the global economy, not only in Latin but also among many countries, the evolution of the credit conditions has a good impact on our economy. In the last world bank outlook, the IMS downgraded the for 2019 and 2020 global GDP growth, arguing that increasing more tensions had been raising the certainty, affecting investment and international trade. As you can see in the upper left chart, there's been a generalized drop in the global industry where similar BMI indexes have fallen even below the threshold of base to basis points. This evidence suggests that the narrative cycle will not hold a longer period. In this environment, most central banks have been more willing to work a more expansionary buyout in very recent monetary policy meetings since most of them have opened the door for rate cuts before the end of this year. However, it's important to highlight that the central bank of Chile has been the only one able to drop the interest rate in Latin America.

After reducing the rates by 50 basis points to within 5% [inaudible]. Consequently, we received the lowest point to wait in both nominal and real terms in Latin America as can be observed in the other red charts. This efficiency pulls through the strong ability of the central banks to implement [inaudible] equalities, which is extremely important in negative cycles like we have had this year. Undoubtedly, this area of unexpected chase in monetary policy was cultivated to upset the worst blowout conditions. This change in monetary policy was supported by both the worsening in global conditions and the weather on a tightened local growth. As the bottom left chart shows, the Chilean economy had its largest growth in the first quarter in line with the trend of turf in most countries. Although part of this disappointing GDP was attributable to temporary sectors such as the heavier rains in several mine zones that were reduced the cover production in the first quarter.

We also observed a weak expansion in the rest of the economy. The good news, however, has been the slight recovery of turf in recent months. Between April and May, for instance, the GDP was up 2.4% year-on-year, which is better than the 1.6% posted in the first quarter. On a sequential basis, by its latent seasonal factors, the economy expanded at annualized rate of 3.1% in May after the now expected expansion recorded in the previous quarter. Therefore, the Chilean economy is performing better than most of its peers. This market of recovery has been inflamed, in part, by the improvements in the labor market. As the bottom right chart shows, both nominal and real wages are growing slightly faster while the guild creation has been supported by rates for employment greater than self-employment. These factors suggest that the labor market is providing more support for domestic demand, compensating the negative that's below there from the world economy and decline in domestic confidence.

We think that [inaudible] another stating of factors sets up a more expansionary monetary policy, a better dynamism in the labor market. And the weaker currency will lead to better conditions for the future. Having said that, I would like to talk about our baseline scenario for 2020. Please turn to slide No. 5. We think the first quarter was the bottom of this negative cycle. As we mentioned before, the economy has shown signs of recovery, which is safe to continue in the future. Specifically, we estimate a number of economic growth of 3.3% in the second half of this year. We're just gonna see them with an expansion of 2.8% over the whole year. In 2020, we expect GDP to go up by 3.2% as shown in the upper left chart. There are several factors behind our positive view. First, the lag effect of the interest rate cuts applied by the Chile Central Bank here. Second, the positive trend of turf in private investment.

Third, the company has increased its potential capacity for growth as a consequence of the material increase of immigration to Chile. In fact, the central bank of Chile raised the forecast for potential growth from 3.2% to 3.5%. These original rates have remained in the lower part of the central bank range, which is between 2% and 4%. In June, the CPI posted a year-on-year increase of 2.5% as a consequence of the 1.2% quarterly change observed in the second quarter. As we have mentioned in previous conference calls, the low inflation from the below-trend growth has been upset by the weaker Chilean peso.

As the bottom left chart shows, we expect the CPI to converge to the 3% surge in 2020. Finally, our monetary policy will stay the rate cuts to continue in the future. Since increasing expectations have been anchored to the long-term policy value of 3%, and the economy will likely remain growing lower than the long-term rates, the central bank have room to continue decreasing the monetary policy rate. Specifically, we see two 25 basis point red flags in the remaining of this year and the beginning of [inaudible] process late in 2020, as economy shows from the inside of recovery. Our interest rate forecast is shown in the bottom right chart in this slide.

Now, I would like to briefly discuss the evolution of the Chilean banking industry. Please turn to slide No. 7. Despite the below-trend economic trend of turf since last year, the banking industry has maintained solid financial results and high profitability levels. In the second quarter, the long-term banking industry posted a net income of 812 billion, which is 42% higher than the same fee year of second quarter that year. Therefore, as of June 2018, the total net income was 1,383 billion Chilean pesos representing that 8% increase in comparison to the first semester of 2018. We postpone an ROE of 14%. The positive quarterly result posted by the industry were supported by several factors including increased total revenues due to the effect of higher inflation on the [inaudible] held by most of the trend and loan growth of 10% year-on-year, as of June. And we suspect this remaining in low level.

The chart located in the lower part of the slide shows a strong correlation between GDP and loan growth. On average, the elasticity of loan is close to two times the GDP growth. I'll just say the economy's increase each growth rate in the future. It's reasonable to forecast an acceleration in the loan expansion in the coming quarters to levels of almost 9% in nominal terms. The positive result of the industry was in part explained by the outstanding bottom line posted by Banco de Chile this quarter. Following here, our head of investor relations will analyze our performance in the second quarter. I will ask that -- I will remain -- [inaudible] initiatives.

Pablo Mejia -- Head of Investor Relations

Thank you, Rodrigo. Please turn to slide No. 9. We're proud to present our second quarter 2019 financial results. This quarter, we recorded the highest quarterly net income figure in our history of 192 billion pesos, well above the level recorded in the first quarter of 2019 in the same period last year. As you can see on the chart on the bottom left, we ranked first in terms of net income generation with a wide difference when compared to our peers. This strong result was explained by robust customer and non-customer income growth, which more than offset higher provisions for loan losses, operating expenses, and taxes. In the next slides, we'll go into a deeper review of each one of these concepts. Please turn to slide No. 10. As you can clearly see, operating income this quarter grew strongly at 17.7% over the same period last year, reaching 538 billion pesos thanks to our superior business strategy that is focused on continuing to penetrate the retail segment and growing selectively the wholesale segment.

On the chart on the left is a breakdown of operating income. Revenues were up due to a large increase in customer income that grew 11.5% year-on-year or 41 billion pesos. This was driven by an expansion in loan volumes as well as higher contribution of demand deposits that benefited our funding costs. Additionally, we recorded a strong increase in fee income of 24.6% over the same period last year. We'll go into greater detail regarding this further on in the presentation. In terms of non-customer income, we also had important results thanks to a spike in inflation that reached 1.22% this quarter and drilled the source of revenue up 40.2% or 39 billion pesos. Terminally, the decrease in nominal and real interest rates following the 50 basis point cut in the reference rate by the central rate also benefited our position in fixed income security housing for trading and ASS security. On the chart to the right, you can observe the impact of inflation on NIM.

Last quarter, we recorded a NIM of 3.79% with 0% inflation. This quarter, our NIM rose by 75 basis points, mainly as a result of higher inflation amounting to 1.2%. Throughout our history, Banco de Chile's focus has been to promote a strategy of responsible growth in every segment we serve. We believe that this has been a core of our solid track record. As a result, today we have a larger percentage of our portfolio concentrated in low-risk segments such as high net worth individuals, high quality SME customers, and blue chip wholesale book customers, all of which allow us to lead the industry in operating revenues, net of provisions as a percentage of interest-earning assets with a 5.5% level. And this figure denotes a wide gap with all of our peers. It's important to mention that every 10 basis points of operating margin translates for us into almost 3 billion pesos of additional revenues on an annual basis. Please turn to slide 11.

Fees this quarter grew strongly, posting 112 billion pesos, up from 90 billion the same period last year. These were mainly driven from the retail segment products and services. Insurance fees grew significantly, up 9.2 billion pesos or 33% due to a 19% increase in annual written premiums and the first-time recognition of income related to the 15-year joint venture agreement with a prestigious international insurer. Transactional products also had a superb growth during the quarter with card fees growing 5.3 billion pesos in line with the changes we have made in our loyalty program as well as royalty payments and ATM fees that were up 3.4 billion pesos thanks to the expansion of our ATM network given the commercial partnership achieved with an important retail company at the end of 2018. Finally, mutual funds management fees have also grown substantially, up 2.6 billion pesos due to revisions on management fees of certain funds, changes in mix, and expansion assets under management.

Consequently, we have been able to enlarge our leading position in terms of net fees the month it appears. We consistently rank first with a overall market share of 20.3% as a percentage of operating revenues. We reached 21.9% well above our peers, as shown on the bottom charts of this slide. This level results of our premium customer base reflected in our market share and personal banking current account deposits that normally ranges from 25% to 30% as well as our excellent market share at AUM. Please turn to slide 12. Without a doubt, we are the financial institution with the best funding structure in Chile, which remains as one of our most important competitive advantages. The sharp reduction in the overnight rate by the Chilean Central Bank in June caught everyone by surprise. And the consensus today is expecting more rate cuts in the coming months. We expect that this will benefit us during the next three months as a result of repricing of short-term liabilities and in the medium term, should gradually see an impact in NI.

The bank sensitivity to a reduction of 100 basis points over a 12-month period is negligible. However, in the medium-term, that's more than three years, the impact is around 30 basis points in NIM. As you can see on the chart, demand deposits are a very important source of funding for Banco de Chile, and they represent 26% of total liabilities where more than half of these liabilities come from the retail segment of these deposits. In terms of market share, thanks to our effective commercial strategies, service quality, and our ability to cross out and maintain customers that use our bank as their primary bank account, we have maintained our leading position with a stake that hovers around 23%. This market-leading position together with solid credit risk ratings has permitted us to post once again the lowest cost of funds in the industry with an average level of 2.3% in the local currency. Please turn to slide 13. Total loans this quarter grew by 8.7% year-on-year.

The retail segment continues to be the driving force behind these figures rising 11.1% year-on-year while wholesale loans only grew by 4.9% during the same period. More importantly, on a quarter-on-quarter basis, our loan portfolio grew 2.3%, which denotes a 9.5% annualized growth rate. Both the retail and wholesale banking segments posted strong growth of 2.3% this quarter versus the immediate prior quarter. The chart on the right shows a breakdown of loans by segment. In loans to individuals, the main driver for growth was mortgage loans and commercial and SME customers that led growth, both increasing more than 12% year-on-year. The strong level of mortgage loan growth is due to strong demand of property together with very attractive rates that have recently become even more appealing to customers due to the prevailing scenario of low, long-term interest rates. On the chart on the bottom left, you can see how originations have sharply increased by 45% over the same period last year in residential mortgage loans.

Our excellent performance in SME commercial loans was thanks to effective commercial strategies that focused on bringing customers closer to the bank as well as new, preapproved loan model for these customers. As you can see on the chart on the bottom left, SME commercial loan originations also grew sharply at 12.2% year-on-year. Since SME penetration in Chile is still very low, we expect that the SME growth will continue posting attractive growth rates in the medium term. In terms of our wholesale segment, growth was driven by loans to the middle-market companies, which increased 8.6% year-on-year. The corporate area grew more slowly at 3.6% year-on-year but when compared to the first quarter 2019, accelerated to 3.6% or 10.8% annualized. Also worth noting is that during the second quarter of 2019, our corporate division managed to closed important long-term lending deals that contributed to the quarter-on-quarter growth posted by the segment.

Similarly, we expect loan growth in the segment to also show a recovery in the coming quarters as soon as investment regains dynamism. It's in the spirit that a key part of our success in growing the retail loan book has been our focus of continually improving customer experience while providing them with superior products and service channels that they demand. Please turn to slide No. 14. The investments we have made in recent years are permitting us to implement significant transformation in our retail banking service model. Since 2015, we have been developing many IT projects to create the best customer experience for our customers and to improve commercial activities as well as operating efficiency. In 2017, we began to test a pilot service model in 16 branches. Results were very positive, improving sales, customer experience, and even job satisfaction. Consequently, we have decided to roll out this parameter across the entire branch network.

Three key changes of this model are first, we are continuing to optimize the branch network by combining some credit Chile branches into Banco de Chile locations in order to improve for activity and customer experience. This process is taking advantage of our strong brand and permits us to have better economies of skill. Second, a significant improvement in our personal banking service model, which is focused on providing tailored services to all segments that we serve. This involves expanding our account manager responsibilities so that they manage both assets and liabilities of our customers. This has been facilitated through our new CRM platform that permits account officers to have a full 360 degree understanding of our clients, thus enhancing across all opportunities in credit and non-credit products and services. Third, we are improving several activities at the branch level. We are implementing modern self-service equipment across all of our branch network.

These terminals and ATMs will permit our customers to perform essentially all the functions that today require the assistance of a teller or customer service executive. We have also seen important improvements in customer experience through the use of greeters at these new branches. All of this technological investment will allow us to centralize activities, achieving simpler processes that will free up time of our account managers to carry out more commercial activities, increasing the productivity of our salesforce. Please turn to slide 15. This quarter, we posted a cost of risk of 67.9 billion pesos. As you can see on the chart on the upper right, we incurred a net credit deterioration of 15.6 billion, which was mainly originated in wholesale and the wholesale segment. Nevertheless, this figure was influenced by very good credit behavior in the second quarter of 2018. We also recorded 6.8 billion higher provision expenses due to higher volume and change in mix toward the retail segment.

As mentioned earlier, our growth has been concentrated more in personal and SME banking, which have higher risk than wholesale customers but also have much higher spreads. Lastly, the appreciation of the Chilean peso to the US dollar when compared to the second quarter of 2018 benefited our allowances for loan losses denominated and foreign currencies by 8.2 billion pesos, partly offsetting the prior impact. In terms of cost of risk, we reached 0.96% this quarter and 1.12% for the full year completely in line with our guidance. It's important to highlight that we strive to have the best credit risk policies in the industry. And this translates into very stable and low NPL ratios as well as higher coverage ratios. As you can see on the chart on the bottom left, our delinquency ratio compares very favorably to our peers and actually decreased when compared to the first quarter of 2019 and the second quarter of 2018.

In terms of coverage, we lead the industry with a level close to two times while our main competition only has levels of around 1.2 times. Before moving on, I want to remind everyone that in July, we will be implementing the new standard model for provisioning SME loans, which will not have a material effect on our bottom line. Actually, we expect the impact to be much lower than the levels that have been reported by our peers in the industry. Please turn to slide No. 16 on operating expenses. Total operating expenses increased 9.5% year-on-year. This rise was influenced by several strategic projects, which permit us to improve our cost structure in the coming years. Currently, we have three main projects occurring simultaneously at Banco de Chile. First, the general transformation has become one of our main short-term challenges.

As a result, we have continued to work diligently to continue implementing new products and service tools and automate processes in order to digitally transform Banco de Chile by means of a comprehensive front to back of all processes involved in our operations. Second, as I mentioned, we recently finished a pilot program that tested a new branch model. Throughout the rest of 2019 and 2020, we'll be transforming our branches into this new model. Lastly, we're in the first phases of implementing an efficiency program at Banco de Chile. We are currently identifying processes that could be improved and streamlined to allow the bank to maximize returns without affecting customer experience. The chart on the right shows the breakdown of expenses related to these projects. More than 70% of the additional expenses this quarter were related to these initiatives while only 5.7 billion pesos were related to recurring expenses. It's also important to highlight that recurring expenses grew 0% in real terms.

Due to our strong operating revenues, our efficiency ratio improved to 43% this quarter. However, we expect that we should end the year at a level close to 44% to 45% for the full year. In the medium term, when all of our strategic projects have been implemented, we believe that we'll be able to reach a significant improvement in efficiency. As you can see on the chart on the bottom right which shows a comparison efficiency ratios and expenses among different banks, we believe that we still have an important opportunity to improve our cost structure. Please turn to slide No. 17. As it's widely known, and thanks to our successful track record, our formal shareholder subs with the profits that we generated fully paid off all the debt it owed to the Central Bank of Chile on April 30th, 2019. This final payment triggered the dissolution of SM Chile and south. Registered shareholders of SM Chile as of May 31st, 2019 received Banco de Chile's shares, increasing the free flow from 27.7% to 44.3%.

This impacted positively our index in the Santiago stock exchange. And we expect that in August, our share will have an important change in the MSTI indexes. Actually, on the local exchange, we are the company with the highest weighting of 11% in the IPSA Index. All this is translated into an increase of 27% in daily trading volumes. We also expect that this will improve our visibility in the market. Please turn to slide No. 18. Before moving on to the Q&A section, I would like to close by emphasizing some of the points we discussed in the presentation and also providing our guidance for the future. As Rodrigo mentioned at the beginning of the presentation, we believe that the Chilean economy will gradually increase its dynamism. Since we expect GDP growth to increase from 2.8% to 3.2% in 2020, we believe that there's room for recovering loan growth to levels close to 9% in nominal terms. In addition, potential increase in inflation to 3% would generate an additional boost in treasury revenues.

We strongly believe that there's spaces for further improvements of an efficiency in addition to the cautious room we've had, which has been reflected in recurring expenses growing 0% in real terms this quarter. We think that the implementation of the projects we are currently working on such as digital transformation, the efficiency program, and the implementation of the new branch service model will allow us to sustainable improve the efficiency ratio. We estimate that the medium-term efficiency ratio should improve by nearly three percentage points. The cost of risk has remained in line with our guidance, which is between 1% and 1.1%. Given our prudent risk policies, the economic outlook, and our healthy loan portfolio, we expect this ratio to remain at current levels for the foreseeable horizon. In this context, we reaffirm our view that Banco de Chile will be able to maintain a sustainable ROE between 18% and 20% in the mid-term.

I'd like to end this conference call by highlighting the important increase in the free float, which I mentioned on the prior slide, which occurred after the payment of a subordinated debt. We believe that this will provide us with much more visibility. And hopefully, this will translate into greater trading revenues in the future. Thank you for listening. And if you have any questions, we'd be happy to answer them.

Questions and Answers:

Operator

Thank you. The floor is now open for questions. If you have a question, please press *1 on your touchtone phone at this or any time. If at any point, your question is answered, you may remove yourself from the queue by pressing *2. Questions will be taken in the order they are received. We do ask that when you make your question that you pick up your handset to provide optimum sound quality. Please hold while we poll for questions. Our first question comes from Alonso Garcia with Credit Suisse. Please go ahead.

Alonso Garcia -- Credit Suisse -- Analyst

Good morning, everyone. And thank you for taking my question. My first question is regarding fees. I just wanted to get some more clarity regarding the impact on your fee line from a distribution of insurance with this new agreement that you reached earlier in this year. I just want to know out of this 9 billion pesos of original income compared to last year, how much really came from this new partnership? And how much of that relates to the one-time payment? And how much relates to the recurring original income that you will have throughout the life of this contract? And my second question would be on optics, as some of these initiatives that you mentioned on the transformation front are still ongoing and will still be ongoing this year and next, I would like to get more color from you on the total optics growth you are expecting for this year and 2020. Thank you.

Daniel Galarce -- Head of Financial Control

Hi, everyone. This is Daniel Galarce. So, regarding your first question, the income and the fee line of this partnership, during June, we began to recognize that some of the upfront or some part of the upfront regarding this new partnership. As you mentioned, our fee income related to the insurance brokerage business increased 9 billion year-on-year, and approximately 4 billion were related to part of the recognition of part of this upfront. Today, we are just recognizing part of the upfront related to some part of the insurance business since we still need to start with the other part of the partnership related to the life insurance business. In the coming months, probably we will have some similar amounts of -- as long as we implement this partnership. So, basically, by the end of the year, we should have something similar between 3 and 4 billion pesos per month.

Alonso Garcia -- Credit Suisse -- Analyst

Okay. And that comes from -- again, sorry -- from the upfront payment? Or --

Daniel Galarce -- Head of Financial Control

Yes, absolutely. It's only related to the upfront payment. And of course, we have some ability by which we recognize this over the lifespan of the transaction or of the partnership. But everything is additionally compressed, of course.

Alonso Garcia -- Credit Suisse -- Analyst

Okay. So, 3 to 4 billion each month going forward from this --

Daniel Galarce -- Head of Financial Control

Something like that. It's potential implementation.

Pablo Mejia -- Head of Investor Relations

In regards to their question about expenses, similar to how we showed in the slide, I think it's important to mention that recurring expenses for the year should grow slightly above inflation. The increase that we've seen has been because of those three projects that we mentioned. And for the remainder of the year, we expect that there should be a slight decrease in total operating expenses. And this should translate into a better efficiency ratio of around 44% to 45%. We're not expecting a large material effect that would really impact our bottom line. So, we still expect that we should have improvements in efficiency ratio for the full-year figure and levels of around 44% to 45%. In 2021, we should have -- sorry. In 2020, we should have levels similar, around 44% to 45%. And in the year 2021, we're expecting that we should start to see an improvement in efficiency by those three percentage points that we were mentioning to gradually improvement in efficiency.

Rodrigo Aravena -- Chief Economist and Senior Vice President-Institutional Relations

Sorry. I would like to highlight one thing that we mentioned in the presentation about our main role of improving the efficiency ratio for the future. So, basically, after implementation of these initiatives, we aspire to have accruement and efficiency ratio for around that three points in the long run. It's important to keep in mind what we mentioned in slide 16 in terms of the recurring expenses [inaudible] and it's also important to keep in mind that there will be important amount of investment on top of the new branch model with new branch investment with the decision during the time. So, basically, I think that it's very important to keep in mind that there's room to continue improving efficiencies for the time.

Alonso Garcia -- Credit Suisse -- Analyst

Thank you. Thank you very much.

Operator

Our next question comes from Jason Mollin with Scotiabank. Please go ahead.

Jason Mollin -- Scotiabank -- Analyst

Hi. Thanks for the opportunity to ask a question. You mentioned again reiterating the outlook for long-term ROE in the 18% to 20% range. I just wanted to get your feedback on the current environment for long-term interest rates in Chile and the implications on long-term returns. Do you think that where we are -- at under 3% was the last number I saw in the 10-year local currency Chilean bond -- if that really, in the long-term, we should expect ROEs to come down with this kind of interest rate environment? Or are you expecting an expectation of 18% to 20% that rates will normalize? Thanks.

Rodrigo Aravena -- Chief Economist and Senior Vice President-Institutional Relations

One second please, Jason.

Pablo Mejia -- Head of Investor Relations

Hi, Jason. Pablo speaking. For this year, we think it'll be -- that this is a transitory event. But we don't think that it'll be a long-term interest rate levels at these low levels. We believe that the level's closer to 4%. In terms for NIM, we think that NIM should be hovering around 4.3%-4.4% for this year. And in Rodrigo's baseline scenario, which we'll mention in greater detail right away, he's expecting a gradual increase in the overnight rate in the coming years.

Rodrigo Aravena -- Chief Economist and Senior Vice President-Institutional Relations

Yeah. I think it's very important to keep in mind with a long-term rate with a long-term view, the fact that the central bank improved the estimate of potential ability growth of Chile from 3.2% to 3.5%, which is consistent with different interest rates for the future. All in all, I think that it's very important to consider that the new branch interest rates for Chile, the overnight interest rates for Chile is around 4%. And therefore, we think that these very low-interest rates will be temporary for the economy. We understand that we have a below-credit economic growth. We have inflation rates remaining below the central bank target, which is consistent with expansionary multi-policy. However, for the long-run, it's reasonable to say higher interest rates. The new interest rates I believe it's around 4%. So, in the next two or three years, perhaps we will have a more neutral interest rate with high inflation rate. So, the current interest rate will likely be only temporary.

Jason Mollin -- Scotiabank -- Analyst

That's helpful. Thank you very much, Rodrigo. Thank you, Pablo.

Operator

Our next question comes from Sebastian Gallego with CrediCorp Capital. Please go ahead.

Sebastian Gallego -- CrediCorp Capital -- Analyst

Hi, everyone. Thank you for taking my question. I have a couple of questions. First, just more color on fees. When you look at the actual financial statements for Banco de Chile, you see that expenses from fees have actually declined compared to a prior year. Can you comment if there are any accounting treatments that have resources in decline of expenses from fees? Or is there any other accounting stuff that you have to mention just to mitigate the effect of what would be the effect from all the things that you had mentioned? That's the first question. Second question comes from the rehabilitatory front. Are you expecting any changes on the rehabilitatory front coming from the provision expense side to restrictive circles? Thank you.

Pablo Mejia -- Head of Investor Relations

So, in terms of fees, the recondition of this international insurer that Daniel Galarce mentioned, which was about 4 billion pesos of additional revenue. We also had very good revenues and other line items, especially in transactional products, which were related to the ATMs and credit card business. And in terms of expenses for these fee expenses, there was a reduction. And that's also related to our credit card business. Basically, we adjusted our loyalty programs for the credit card business. In terms of the provisionary model for our SMEs, your second question, the impact for us is actually quite low. But we're expecting to implement in July. It's around 6 billion pesos, higher cost of brick related to the new provisionary model. And then we're not expecting right now any new changes in terms of provision.

Sebastian Gallego -- CrediCorp Capital -- Analyst

All right. Do you have UPR side venue on the UPR side, on the adjustment of the credit card business? What was the adjustment that you made that we can see lower expenses from fees?

Pablo Mejia -- Head of Investor Relations

It's related to the loyalty program. The benefits our customers receive from the loyalty program fees, loyalty program, were adjusted.

Sebastian Gallego -- CrediCorp Capital -- Analyst

Okay. All right. Thank you.

Operator

Our next question comes from Ernesto Gabilondo with Bank of America. Please go ahead.

Ernesto Gabilondo -- Bank of America Merrill Lynch -- Analyst

Hi. Good afternoon. And thanks for the opportunity. My first question is a follow-up on expenses. We have seen one of your key competitors with an investment plan for the next three years. So, why do you think your three new projects will be enough to remain competitive? Or why do you think you could be ahead of the industry? My second question is on market-related revenues. I believe it was kind of high during the quarter. So, do you think this could be sustainable for the rest of the year? And my last question is on your effective tax rate. I believe it was lower than the previous quarter. So, what is the normalized level we should expect in the next quarters? Thank you.

Pablo Mejia -- Head of Investor Relations

Hi, Ernesto. Can you repeat the second question, please?

Ernesto Gabilondo -- Bank of America Merrill Lynch -- Analyst

Yeah. The second question is on market-related revenues. I think they were kind of high during the quarter. So, just wanted to know if this could be sustainable in the rest of the year.

Pablo Mejia -- Head of Investor Relations

Okay. Thanks. In terms of the projects that we're implementing on the cost side, the efficiency part that will improve efficiency and also improve our commercial activities, we think that this is a -- generalizing the bank has been very important for Banco de Chile not only this year but over the last four or five years. We began in 2015 with a variety of projects that you can see on the presentation, which improved the use of information, big data that Banco de Chile has basically to understand customers better. We implemented a personalized item system. We implemented a database for growing our customer base in a much more productive fashion. We also implemented a new preapproved consumer and SME book to also drive sales in that book at lower risk and higher spread. And now, we have began adjusting the service model in our branches.

So, basically, the new service branch model is focused on improving customer experience and by implementing self-service machines that will also reduce operating expenses, improve productivity, and, at the same time, also improves customer experience at the branch. What we've seen is an improvement in operating expenses at the branch level, a higher level of commercial activities or the sales. And because we've seen this at the pilot program, we decided to roll this out across the entire branch network. The other projects in terms of efficiency is the efficiency project. Basically, what we're doing today is identifying this year, 2019, different areas of Banco de Chile where there's room to continue streamlining processes and improving the role overall operative -- the operations of Banco de Chile. And in the coming years, we'll be implementing these changes across the bank.

With this, I think the digitalization like we've been doing the last four or five years, this new service model, the improvement of the efficiency, this new area that's looking at improving efficiency at Banco de Chile, it's important steps in order to remain competitive in the industry not only on the sales side to continue growing and how the customers bank with us but also on reducing cost to provide our shareholders with these high ROEs.

Rodrigo Aravena -- Chief Economist and Senior Vice President-Institutional Relations

I would aim to reinforce the idea that as we mentioned the last slide in the presentation, there's something you need to take away. We are very confident that after the implementation of all the the ways we make equivalent amount of we think 300,000 for hundred millions of dollars over the next three years will be enough to maintain our sustainable ROE between 18% and 20% as we mentioned in the last slide of the presentation with a [inaudible] in the industry. So, all in all, we are very confident that after the implementation of all this [inaudible] we will remain continue being the leader in the industry. Anything else you wanted to add?

Daniel Galarce -- Head of Financial Control

Yeah. Hi. Regarding treasure business or treasury revenues, of course, the second quarter was quite particular in terms of the behavior of interest rate and local interest rate in nominal and real. And it's difficult to expect something very similar for the future. In particular, due to the current levels of interest rate. However, we also suspect over the rest of the year that that inflation should normalize to the levels of 2.6% to 2.8% on a year-on-year basis. So, basically, probably we will not have the revenues that we saw during the second quarter in terms of a per-value adjustment for security. But we will benefit from high inflation. So, all in all, we should be in the average levels that we had in the first quarter and the second quarter and in terms of treasury and revenues.

Ernesto Gabilondo -- Bank of America Merrill Lynch -- Analyst

Okay. Great. Thank you. And I'm sorry. The effective tax rate?

Daniel Galarce -- Head of Financial Control

Oh, the effective tax rate should be around 23%-24%. It depends on inflation, of course. Even our taxation regime. But the difference between the first quarter and the second quarter, of course, was due to inflation. The inflation the first quarter was 0% and the second quarter was 1.2%. But with a normalized inflation of around 3%, we should have a lower interest rate regarding the statutory corporate tax rate, which will have an effective tax rate of around 23% to 24%.

Ernesto Gabilondo -- Bank of America Merrill Lynch -- Analyst

Great. Thank you very much.

Operator

This concludes the question and answer section. At this time, I would like to turn the floor back to Banco de Chile for any closing remarks.

Pablo Mejia -- Head of Investor Relations

Thank you for listening to our call. And we look forward to speaking with you on our next conference call.

Operator

This concludes today's presentation. You may disconnect your line at this time. And have a nice day.

Duration: 57 minutes

Call participants:

Rodrigo Aravena -- Chief Economist and Senior Vice President-Institutional Relations

Pablo Mejia -- Head of Investor Relations

Daniel Galarce -- Head of Financial Control

Alonso Garcia -- Credit Suisse -- Analyst

Jason Mollin -- Scotiabank -- Analyst

Sebastian Gallego -- CrediCorp Capital -- Analyst

Ernesto Gabilondo -- Bank of America Merrill Lynch -- Analyst

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